Discuss about the Audit Risks Of Digital Bank Of Singapore.
Auditing refers to the process of inspecting the financial statements of the business entities in order to make sure that they are free from material misstatements (William Jr, Glover and Prawitt 2016). For this reason, it is the responsibility of the auditors to assess the audit risk in the organizations. On the other hand, business organizations are exposed to some of the major risks while conducting their business operations and these risks are called the business risks like liquidity risk, credit risk, level of competition and others. While conducting the audit operations, the auditors are required to assess the impact of all these business risks on the audit operations (Leung et al.2014). The main aim of this report is to analyse and evaluate the business as well as audit risks of Digital Bank of Singapore, commonly known as DBS and the ways to reduce the overall risk level. DBS is regarded as a leading multinational banking and financial service corporations of Singapore. It was established in the year of 1968 and is headquartered at Marina Bay Financial Centre, Singapore. DBS provides different types of financial products and services; some of the major products and services of the bank are retail banking services, corporate banking services, investment banking services, mortgage loans, wealth management services, private banking services, credit cards, finance services and insurance. DBS has an employee base of around 24,200 (dbs.com 2018).
While conducting the banking operations, DBS has to confront with some of the crucial risk factors and the presence of these risk factors can be seen in both internal as well as external business environment. The following part of the study provides the analysis of the major business risks factors of DBS:
Ownership Structure: The ownership structure of the banks has relationship with business risks. The ownership concentration works as a mechanism in order to align the interest of the management to the shareholders having intrinsic incentives to risk shifting and there is not any exception of this fact in case of DBS (Dong et al. 2014). Thus, loopholes in the ownership structure can expose DBS to major business risk (Sadgrove 2016).
Customer Relationship: It is the main business requirement of DBS to cater to the needs of the customers by providing their suitable banking products and services as it helps in maintaining good relationship with the customers. Failing to satisfy the needs of the customers can lead to poor financial performance of DBS as it will affect the revenue as well as profitability (Waemustafa and Sukri 2015).
International Business: While conducting the international banking operations outside Asia, DBS is exposed to international business risks related with foreign exchange risk and Political risk (Cavusgil et al. 2014). As DBS deals with financial products and services, fluctuations in exchange rate can cause financial risk to DBS. In addition, less compliance with the international political regulations can also lead to compliance risk in DBS (Wild, Wild and Han 2014). At the same time, DBS faces competition from the local businesses that are undertaking major plans for international expansion. DBS is required to take into consideration these businesses also for risk mitigation strategy. In addition, it is needed for DBS to adopt the strategy of hedging for mitigating the risk of foreign exchange. Moreover, it is needed for DBS to comply with the international political regulations in order to convert these risks in strengths (Cavusgil et al. 2014).
Level of Competition: The banking industry of Singapore is a competitive one as every bank is trying to secure their position in the market by providing quality products and services to the customers (Jiménez, Lopez and Saurina 2013). This particular scenario creates risk to DBS as lack of quality products and services can through the bank out of the competition. For this reason, there is a risk of losing the acquired market share (Jiménez, Lopez and Saurina 2013).
Product or Service Reputations: In the competitive banking industry of Singapore, every bank is offering innovative and quality banking products and services to their customers in order t stay in the competition by fulfilling the customer’s need (Gatzert, Schmit and Kolb 2016). There is no exception of this fact for DBS as the overall profitability of DBS largely depends on their quality products and service reputation. Failing to do so can create business risk for the organization (Honey 2017).
Government Regulation: DBS is required to comply with several government rules and regulations for conducting their baking operation and this aspect hampers the business of DBS to some extent (Admati and Hellwig 2014). Most importantly, it is mandatory for DBS to comply with these rules and regulations as failing in compliance can lead to compliance risk to the organization (Franks et al. 2014). One of these is the regulations of Monetary Authority of Singapore, commonly known as MAS. The main aim of MAS is the promotion of sustained non-inflationary economic growth and progressive financial centres (mas.gov.sg 2018). For this purpose, MAS introduces different kinds of banking rules and regulations that all the banks including DBS is required to comply with. Thus, DBS is exposed to compliance risk if fails to comply with the regulations and banking standards of MAS.
Economic Crisis:Rise of labour cost can be seen in the Singapore banking industry due to the effect of global financial crisis and it carets business risk for DBS by taking away the cost advantage of the bank (Demirguc?Kunt, Detragiache and Merrouche 2013). In addition, the strengthening of Singapore dollar in the currency market is making it more expensive for DBS to do business (Demirguc?Kunt, Detragiache and Merrouche 2013).
Impact of Exchange Rate and Interest Rate: The fluctuations in the interest rate and exchange rate can lead to business risk for DBS. The decrease in the interest rate can lead to less profitability of DBS on loans (dbs.com 2018). At the same time, decrease in the exchange rate can also lead to less profitability for DBS. Thus, these two factors expose DBS to major business risk (dbs.com 2018).
Credit Risk: Credit risk is considered as a major measurable risk in DBS. The daily business activities of DBS expose the bank to this risk and these activities are lending to retail banking, corporate banking, institutional customers and others. This risk includes the risk of lending, settlement and pre-settlement of derivatives, debt securities and foreign exchange (dbs.com 2018).
Liquidity Risk: DBS has to confront with liquidity risk while conducting their banking operations. In DBS, liquidity risk arises from the bank’s obligation to honour withdrawal or deposits, repayment of borrowings at maturity and the bank’s commitment to extend the loans from the customers. In order to reduce this risk, DBS continues to address all of the liquidity obligation of their banking operation (dbs.com 2018).
Market Risk: The banking operations of DBS are exposed to two types of market risk; they are trading portfolio market risk and non-trading portfolio market risk. This risk for trading portfolio in DBS arises from market making, client facilitation and benefits from market opportunist. In addition, market risk from non-trading portfolio arises from management of interest rate risk, equity investment and strategic stakes in business entities. DBS uses different types of financial derivatives to mitigate this risk like swap, forward and future, options, hedging and others (dbs.com 2018).
Operational Risk: Operation risk is considered as an inherent risk in DBS and this type of risk arises from inadequate or failed internal process, system, people and different types of external events. For this reason, the objective of DBS is to keep this risk in an appropriate level by taking into consideration all the above-mentioned factors in their baking operations. The approach of DBS for mitigating this risk can be divided into three parts; they are policies, risk methodologies and processes, system and report (dbs.com 2018).
Reputational Risk: DBS has to face the reputation risk due to the failure in the management of the day-to-day baking activities and decisions and due to the change in the business environment. In DBS, this risk is divided into two parts; they are financial risk and inherent risk. DBS addresses all these issues in order to manage this risk (dbs.com 2018).
The assessment of audit risk is regarded as a crucial process in the audit operation for the development of audit risk reduction procedures and there is no exception of this fact in DBS. The auditor of DBS is required to measure the effect of the above-discussed business risks for the purpose of overall risk assessment of the company. The following discussion shows the impact of the business risk factors on the overall audit operation:
The auditor of DBS is required to consider the report of the management of DBS for making of audit opinion and report to the shareholders on the quality of financial statements. Thus, the risk related to ownership structure can affect the audit assessment in DBS. The auditor is required to consider the risk of customer’s relation as it can indicate towards the weakness in the internal control of DBS that leads to the gap between sales and marketing (Griffiths 2016). In case of intentional business risks, the auditor is require to assess that whether DBS is carrying on the international business operations as per the required business and financial regulations. The risk of extreme competition in the banking industry will affect the creation of hypothetical audit case by the auditor of DBS as the auditor’s knowledge about the client’s industry helps them in effective audit planning. It is the responsibility of the management of DBS to maintain the quality of their banking products and services (Knechel and Salterio 2016). Thus, risk in product and service reputation shows the weakness of the management that can affect the audit procedure. Risk related to government regulations shows the non-compliance of DBS with these regulations and it can affect the materiality level determination of the financial statements by the auditor (Griffiths 2016).
Under economic crisis, DBS may do manipulation with their financial accounts in order to show their strong financial position. This type of manipulation or fraud can affect the audit assessment process. The presence of credit risk in DBS implies that the bank lacks policies, procedures, rules and structures to manage this risk. Thus, the presence of credit risk can affect the audit assessment process in DBS (Rezaee et al. 2018). In DBS, liquidity is considered as a major factor and the presence of liquidity risk indicates the missing of corrective measures in the bank that is a major hindrance for the assessment of audit risk. The presence of market risk in DBS indicates towards the weak internal control of the bank and the missing of major parts of internal control. In this situation, it is difficult for the auditors to conduct the audit risk assessment process. The presence of operational risk indicates towards the implementation of weak internal control as well as failure in the internal control. Thus, the presence of weak internal control creates negative effect on the audit risk assessment process. Failure in the day-to-day business activities cam indicates towards weak financial management and internal control in DBS that creates obstacles in the audit risk assessment process (Knechel and Salterio 2016).
The above discussion involves in the analysis of both the business risks and audit risk of DBS. After this analysis, it is required for the auditors to consider certain aspects in order to reduce the overall risks in DBS due to the presence of the above-discussed factors. The following discussion shows the aspects the auditor of DBS needs to consider for the reduction of audit risk:
In this process, the auditor of DBS is required to consider four stages for the reduction of the audit risks. The first stage is risk assessment procedures. In this process, the auditor is required to conduct an enquiry about the objectives and approaches of the management of DBS (Johnstone, Gramling and Rittenberg 2013). After that, the auditor is required to perform analytical procedure for the identification of unusual transactions due to the risk factors that can lead to material misstatements. In addition, the auditor can also observe and inspect for gaining more information about DBS. The next stage involves in gaining understanding about the internal control of DBS as it is majorly helpful in the identification risks of material misstatements. The identification process of the business entity is of utmost importance for the design and implementation of risk assessment process (Christensen, Glover and Wood 2013). Most importantly, this stage will help the auditor of DBS in gaining sufficient audit evidence (Johnstone, Gramling and Rittenberg 2013).
In the next stage, it is required for the auditor of DBS to identify and assess the significant audit risks in DBS that can lead to material misstatements (Chambers and Odar 2015). For this reason, the auditor is required to take into consideration certain aspects that is whether it is a fraud risk, whether the risk has relation to recent economic or accounting events, the complexity of the transactions and others. In the last stage, the auditor of DBS is required to follow the audit risk model for the reduction of audit risk in DBS. In this stage, the auditor is required to distinguish the audit risks among inherent audit risk, control audit risk and detection audit risk so that strategies can be effectively developed for the reduction of audit risk level of the above-discussed factors (Johnstone, Gramling and Rittenberg 2013).
Conclusion
The above discussion involves in the analysis and evaluation of both the business and audit risk of DBS. From the above whole discussion, the presence of some of the major internal as well as external business risks can be seen in DBS and some of them are ownership structure risk, regulation risk, international business risk and financial risks like currency risk, liquidity risk, credit risk and others. It implies that DBS has to confront to these risks at the time of their banking operations. The above discussion also shows that these business risks have connection with the audit risks of DBS as these risks affect the audit risk assessment process of the bank. This particular analysis shows that the major reason for the occurrence of these business risks is the weak internal control of the bank that also as effect on the financial statements of DBS. However, there are some risks that can be occurred due to fraud and error. Thus, in order to minimize these risks, the auditor of DBS is required to consider four stages that will lead to effective reduction of the risks. They are risk assessment, acquiring information about the entity, identification of significant risk factors and development of strategy to minimize these steps. Hence, based on the above discussion, it can be concluded that the auditors of the companies are required to follow certain stages from risk assessment to risk mitigation in the auditing process as it is required to save the companies from material misstatements.
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